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Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. Nos. L-10837-38 May 30, 1958

ASSOCIATED INSURANCE and SURETY COMPANY, INC., plaintiff,

vs.
ISABEL IYA, ADRIANO VALINO and LUCIA VALINO, defendants.

ISABEL IYA, plaintiff,

vs.
ADRIANO VALINO, LUCIA VALINO and ASSOCIATED INSURANCE and SURETY COMPANY.
INC., defendants.

Jovita L. de Dios for defendant Isabel Iya.

M. Perez Cardenas and Apolonio Abola for defendant Associated Insurance and Surety Co., Inc.

FELIX, J.:

Adriano Valino and Lucia A. Valino, husband and wife, were the owners and possessors of a house of
strong materials constructed on Lot No. 3, Block No. 80 of the Grace Park Subdivision in Caloocan,
Rizal, which they purchased on installment basis from the Philippine Realty Corporation. On November
6, 1951, to enable her to purchase on credit rice from the NARIC, Lucia A. Valino led a bond in the
sum of P11,000.00 (AISCO Bond No. G-971) subscribed by the Associated Insurance and Surety Co.,
Inc., and as counter-guaranty therefor, the spouses Valino executed an alleged chattel mortgage on
the aforementioned house in favor of the surety company, which encumbrance was duly registered
with the Chattel Mortgage Register of Rizal on December 6, 1951. It is admitted that at the time said
undertaking took place, the parcel of land on which the house is erected was still registered in the
name of the Philippine Realty Corporation. Having completed payment on the purchase price of the
lot, the Valinos were able to secure on October 18, 1958, a certicate of title in their name (T.C.T. No.
27884). Subsequently, however, or on October 24, 1952, the Valinos, to secure payment of an
indebtedness in the amount of P12,000.00, executed a real estate mortgage over the lot and the
house in favor of Isabel Iya, which was duly registered and annotated at the back of the certicate of
title.

On the other hand, as Lucia A. Valino, failed to satisfy her obligation to the NARIC, the surety company
was compelled to pay the same pursuant to the undertaking of the bond. In turn, the surety company
demanded reimbursement from the spouses Valino, and as the latter likewise failed to do so, the
company foreclosed the chattel mortgage over the house. As a result thereof, a public sale was
conducted by the Provincial Sheriff of Rizal on December 26, 1952, wherein the property was awarded
to the surety company for P8,000.00, the highest bid received therefor. The surety company then
caused the said house to be declared in its name for tax purposes (Tax Declaration No. 25128).

Sometime in July, 1953, the surety company learned of the existence of the real estate mortgage over
the lot covered by T.C.T. No. 26884 together with the improvements thereon; thus, said surety
company instituted Civil Case No. 2162 of the Court of First Instance of Manila naming Adriano and
Lucia Valino and Isabel Iya, the mortgagee, as defendants. The complaint prayed for the exclusion of
the residential house from the real estate mortgage in favor of defendant Iya and the declaration and
recognition of plainti's right to ownership over the same in virtue of the award given by the
Provincial Sheri of Rizal during the public auction held on December 26, 1952. Plainti likewise
asked the Court to sentence the spouses Valino to pay said surety moral and exemplary damages,
attorney's fees and costs. Defendant Isabel Iya led her answer to the complaint alleging among
other things, that in virtue of the real estate mortgage executed by her co-defendants, she acquired a
real right over the lot and the house constructed thereon; that the auction sale allegedly conducted
by the Provincial Sheri of Rizal as a result of the foreclosure of the chattel mortgage on the house
was null and void for non-compliance with the form required by law. She, therefore, prayed for the
dismissal of the complaint and anullment of the sale made by the Provincial Sheri. She also
demanded the amount of P5,000.00 from plainti as counterclaim, the sum of P5,000.00 from her co-
defendants as crossclaim, for attorney's fees and costs.

Defendants spouses in their answer admitted some of the averments of the complaint and denied the
others. They, however, prayed for the dismissal of the action for lack of cause of action, it being
alleged that plainti was already the owner of the house in question, and as said defendants admitted
this fact, the claim of the former was already satisfied.

On October 29, 1953, Isabel Iya led another civil action against the Valinos and the surety company
(Civil Case No. 2504 of the Court of First Instance of Manila) stating that pursuant to the contract of
mortgage executed by the spouses Valino on October 24, 1952, the latter undertook to pay a loan of
P12,000.00 with interest at 12% per annum or P120.00 a month, which indebtedness was payable in
4 years, extendible for only one year; that to secure payment thereof, said defendants mortgaged the
house and lot covered by T.C.T. No. 27884 located at No. 67 Baltazar St., Grace Park Subdivision,
Caloocan, Rizal; that the Associated Insurance and Surety Co., Inc., was included as a party defendant
because it claimed to have an interest on the residential house also covered by said mortgage; that it
was stipulated in the aforesaid real estate mortgage that default in the payment of the interest
agreed upon would entitle the mortgagee to foreclose the same even before the lapse of the 4-year
period; and as defendant spouses had allegedly failed to pay the interest for more than 6 months,
plainti prayed the Court to order said defendants to pay the sum of P12,000.00 with interest thereon
at 12% per annum from March 25, 1953, until fully paid; for an additional sum equivalent to 20% of
the total obligation as damages, and for costs. As an alternative in case such demand may not be met
and satised plainti prayed for a decree of foreclosure of the land, building and other improvements
thereon to be sold at public auction and the proceeds thereof applied to satisfy the demands of
plainti; that the Valinos, the surety company and any other person claiming interest on the
mortgaged properties be barred and foreclosed of all rights, claims or equity of redemption in said
properties; and for deciency judgment in case the proceeds of the sale of the mortgaged property
would be insufficient to satisfy the claim of plaintiff.

Defendant surety company, in answer to this complaint insisted on its right over the building, arguing
that as the lot on which the house was constructed did not belong to the spouses at the time the
chattel mortgage was executed, the house might be considered only as a personal property and that
the encumbrance thereof and the subsequent foreclosure proceedings made pursuant to the
provisions of the Chattel Mortgage Law were proper and legal. Defendant therefore prayed that said
building be excluded from the real estate mortgage and its right over the same be declared superior
to that of plaintiff, for damages, attorney's fees and costs.

Taking side with the surety company, defendant spouses admitted the due execution of the mortgage
upon the land but assailed the allegation that the building was included thereon, it being contended
that it was already encumbered in favor of the surety company before the real estate mortgage was
executed, a fact made known to plainti during the preparation of said contract and to which the
latter oered no objection. As a special defense, it was asserted that the action was premature
because the contract was for a period of 4 years, which had not yet elapsed.

The two cases were jointly heard upon agreement of the parties, who submitted the same on a
stipulation of facts, after which the Court rendered judgment dated March 8, 1956, holding that the
chattel mortgage in favor of the Associated Insurance and Surety Co., Inc., was preferred and superior
over the real estate mortgage subsequently executed in favor of Isabel Iya. It was ruled that as the
Valinos were not yet the registered owner of the land on which the building in question was
constructed at the time the rst encumbrance was made, the building then was still a personality and
a chattel mortgage over the same was proper. However, as the mortgagors were already the owner
of the land at the time the contract with Isabel Iya was entered into, the building was transformed into
a real property and the real estate mortgage created thereon was likewise adjudged as proper. It is to
be noted in this connection that there is no evidence on record to sustain the allegation of the
spouses Valino that at the time they mortgaged their house and lot to Isabel Iya, the latter was told or
knew that part of the mortgaged property, i.e., the house, had previously been mortgaged to the
surety company.

The residential building was, therefore, ordered excluded from the foreclosure prayed for by Isabel
Iya, although the latter could exercise the right of a junior encumbrance. So the spouses Valino were
ordered to pay the amount demanded by said mortgagee or in their default to have the parcel of land
subject of the mortgage sold at public auction for the satisfaction of Iya's claim.

There is no question as to appellant's right over the land covered by the real estate mortgage;
however, as the building constructed thereon has been the subject of 2 mortgages; controversy arise
as to which of these encumbrances should receive preference over the other. The decisive factor in
resolving the issue presented by this appeal is the determination of the nature of the structure
litigated upon, for where it be considered a personality, the foreclosure of the chattel mortgage and
the subsequent sale thereof at public auction, made in accordance with the Chattel Mortgage Law
would be valid and the right acquired by the surety company therefrom would certainly deserve prior
recognition; otherwise, appellant's claim for preference must be granted. The lower Court, deciding in
favor of the surety company, based its ruling on the premise that as the mortgagors were not the
owners of the land on which the building is erected at the time the rst encumbrance was made, said
structure partook of the nature of a personal property and could properly be the subject of a chattel
mortgage. We nd reason to hold otherwise, for as this Court, dening the nature or character of a
building, has said:

. . . while it is true that generally, real estate connotes the land and the building constructed
thereon, it is obvious that the inclusion of the building, separate and distinct from the land, in
the enumeration of what may constitute real properties (Art. 415, new Civil Code) could only
mean one thing that a building is by itself an immovable property . . . Moreover, and in view
of the absence of any specic provision to the contrary, a building is an immovable property
irrespective of whether or not said structure and the land on which it is adhered to belong to the
same owner. (Lopez vs. Orosa, G.R. Nos. supra, p. 98).

A building certainly cannot be divested of its character of a realty by the fact that the land on which it
is constructed belongs to another. To hold it the other way, the possibility is not remote that it would
result in confusion, for to cloak the building with an uncertain status made dependent on the
ownership of the land, would create a situation where a permanent xture changes its nature or
character as the ownership of the land changes hands. In the case at bar, as personal properties could
only be the subject of a chattel mortgage (Section 1, Act 3952) and as obviously the structure in
question is not one, the execution of the chattel mortgage covering said building is clearly invalid and
a nullity. While it is true that said document was correspondingly registered in the Chattel Mortgage
Register of Rizal, this act produced no eect whatsoever for where the interest conveyed is in the
nature of a real property, the registration of the document in the registry of chattels is merely a futile
act. Thus, the registration of the chattel mortgage of a building of strong materials produce no eect
as far as the building is concerned (Leung Yee vs. Strong Machinery Co., 37 Phil., 644). Nor can we
give any consideration to the contention of the surety that it has acquired ownership over the
property in question by reason of the sale conducted by the Provincial Sheriff of Rizal, for as this Court
has aptly pronounced:

A mortgage creditor who purchases real properties at an extrajudicial foreclosure sale thereof
by virtue of a chattel mortgage constituted in his favor, which mortgage has been declared null
and void with respect to said real properties, acquires no right thereto by virtue of said sale (De
 la Riva vs. Ah Keo, 60 Phil., 899).

Wherefore the portion of the decision of the lower Court in these two cases appealed from holding the
rights of the surety company, over the building superior to that of Isabel Iya and excluding the
building from the foreclosure prayed for by the latter is reversed and appellant Isabel Iya's right to
foreclose not only the land but also the building erected thereon is hereby recognized, and the
proceeds of the sale thereof at public auction (if the land has not yet been sold), shall be applied to
the unsatised judgment in favor of Isabel Iya. This decision however is without prejudice to any right
that the Associated Insurance and Surety Co., Inc., may have against the spouses Adriano and Lucia
Valino on account of the mortgage of said building they executed in favor of said surety company.
Without pronouncement as to costs. It is so ordered.

Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
and Endencia, JJ., concur.

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